empirical evidence that family-owned companies, foreign-controlled companies and firms with more than one controlling shareholder are better in terms of ROA.
American Journal of Economics and Business Administration 2 (4): 350-359, 2010 ISSN 1945-5488 © 2010 Science Publications
The Impact of Foreign Ownership on Firm Performance, Evidence from an Emerging Market: Turkey Ali Osman Gurbuz and Asli Aybars Department of Business Administration, Faculty of Economics and Administrative Sciences, Marmara University, Turkey Abstract: Problem statement: The inflows of foreign direct investment are important sources of finance for developing countries. Due to the increase in the amount of the international flows of capital over the last three decades, the issue of the possible impact of foreign direct investment on the performance of corporations and thus the economy has gained increased attention. The purpose of this study is to explore how the financial performance of the companies listed on the Istanbul Stock Exchange (ISE) is affected by foreign ownership. Approach: This study employed panel data analysis on a sample of 205 non-financial listed companies covering the 3 year time period from 2005-2007. After having examined previous empirical work, several firm and industry related variables are included to eliminate the likely impact of other factors on corporate financial performance and to accurately demonstrate whether there are any significant differences in the financial performance of the firms due to foreign ownership. We also take into account the existence of a potential reverse relationship and conduct causality tests between the measures of financial performance and percentages of foreign ownership. Results: The results indicated that minority foreign-owned companies (MIN) perform better than domestic ones (DOM) in terms of operating profitability. When return on assets is employed as a performance measure, it is observed that MIN perform better than both DOM and majority foreign-owned companies (MAJ). It is also found that MAJ perform worse than DOM. The results of further analyzed, which employ yearly dummies for different ownership structures, are also provided. Conclusion: The overall results of this study indicated that foreign ownership improves firm financial performance in Turkey up to a certain level, beyond which additional ownership by the foreigners does not add to firm profitability. As it is obvious that the recent financial crisis will reduce the amount of international movement of capital, it is important to analyze the case prior to the crisis to be better able to gauge the possible impact of the lack of these inflows on companies in 2009 and onwards. Key words: Foreign direct investment, multinationality, financial performance, emerging market, panel data analysis some different aspect of the topic. Most of the studies have followed a macro perspective with the emphasis usually on the home and host country effects and determinants of FDI. The spillover issues have also gained much attention. However, studies that employ a micro perspective focusing on individual companies have been less abundant in previous literature. Therefore, this study aims to fill a gap; especially in the case of emerging markets. As FDI is a crucial element of the financing decisions of developing countries, the possible impact of FDI on the performance of corporations and thus the economy has to be analyzed to enable the policymakers
INTRODUCTION The world economic system has been restructured by the increase in the international flows of capital which take the form of Foreign Direct Investments (FDI), foreign portfolio investments and loans. It has been observed that direct exports are gradually being replaced by the sales of foreign affiliates in the host countries. This phenomenon leads to the replacement of international trade by FDI. Due to the significance of the share of FDI among the other forms of international flows; many studies have been conducted in literature, each investigating
Corresponding author: Ali Osman Gurbuz, Department of Business Administration, Faculty of Economics and Administrative Sciences,
Marmara University, Turkey
350
Am. J. of Economics and Business Administration 2 (4): 350-359, 2010 capital intensity are controlled for. However, they state that the efficiency and income levels in Canada are increased by FDI because of the tendency of foreign firms to pay higher wages to production workers (Globerman et al., 1994). Kim and Lyn (1990) examine the firms operating in the US to gauge whether there are any differences in the performance of foreign and domestic companies. They provide empirical evidence that domestic firms are more profitable in terms of return on equity after taxes, indicating that foreigners invest in the US to take advantage of the technological and economic prospects. Foreign multinationals are also found to be less efficient in terms of asset management which can be shown by their lower turnover ratios than their domestic counterparts. When the performance of the foreign firms are evaluated on the basis of the country of origin, Western European firms are measured to be the most profitable and efficient ones (Kim and Lyn, 1990). Boardman et al. (1997) analyze the profitability differences between domestic firms and MNE subsidiaries in Canada from the perspective of agency costs. They find foreign subsidiaries to be more profitable and productive than their domestic counterparts. Upon further analysis they conclude that the effects of agency are the sources of the performance premium, with more concentrated ownership leading to improved performance (Boardman et al., 1997). Gugler (1998) tests the association between firm profitability and ownership structure by focusing on the effect of ownership concentration and identity on a sample of non-financial Austrian companies. The results indicate a significant and negative relationship between ownership concentration and profit margin. However, foreign ownership is found to improve firm profitability (Gugler, 1998). Oulton (1998) investigates whether manufacturing and non-manufacturing foreign-owned companies are more productive than domestically-owned companies in the UK. The results indicate that productivity is increased by US ownership in both the manufacturing and non-manufacturing companies by 26 and 34%, respectively. A rise in production is also noticed by non-US foreign ownership with a 14% increase in manufacturing and a 31% increase in nonmanufacturing companies (Oulton, 1998). Blomstrom and Sjoholm (1999) explore the differences in labor productivity between foreign and domestic companies in India. They find foreign ownership to be a statistically significant determinant of firm productivity alongside the level of capital intensity, the skill of the labor force, capacity utilization and operational scale. When foreign firms are further
to follow the right course of action. Certain factors make Turkey an important case study. First, the share of developing countries as recipients of foreign flows has been gaining importance, especially over the last three decades and Turkey has been an important player among developing nations due to the size of its economy and potential. The second factor relates to the health and stability of the Turkish economy. The inflows of FDI to Turkey are projected to be relatively more stable than those of other emerging markets in the near future as a result of the precautionary actions taken after the financial crisis in 2001. The remainder of the study is organized as follows: the following section provides information regarding the recent literature about the relationship between multinationality and firm financial performance. Then, the data, sample selection and the variables employed are set out. Materials and methods are revealed in the subsequent section. Lastly the results are evaluated and concluding remarks are provided together with theoretical and managerial implications. Recent literature relating to the relationship between multinationality and firm financial performance: Many scholars have recently been investigating the relationship between multinationality and the performance of the firm because of the increase in the amount of overseas investment in the world economy. However, no consensus has been reached in spite of the vast amount of empirical work. According to Gomes and Ramaswamy (1999), the reason for the lack of consistent findings relates to the fact that the costs of internationalization have been ignored by the early researchers and that the relationship has not been analyzed across time. The individual strategies of firms also add to the complexity of the relationship (Kotabe et al., 2002). In their work, Geringer et al. (1989) show that the diversification strategy of the firm affects its performance. Specifically, related diversification leads to superior performance. Furthermore, the results indicate that a threshold exists beyond which the increase in the degree of internationalization no longer results in better performance (Geringer et al., 1989). The remainder of this section is dedicated to previous empirical research that was instrumental in the development of the model that forms the analytical core of this study. A study conducted by Globerman et al. (1994) assesses the performance of domestic and foreignowned establishments in Canada. As a result of their empirical work, they conclude that there is no significant difference between the productivity of these two types of establishments once factors like size and 351
Am. J. of Economics and Business Administration 2 (4): 350-359, 2010 Wiwattanakantang (2001) evaluates the impact of controlling shareholders on the financial performance of firms in Thailand. As a result of the analysis, he concludes that firms with controlling shareholders are better performers in terms of accounting-based measures, namely ROA and sales-assets ratio. However, no significant difference in performance is observed in terms of Tobin’s Q. They further compare the performance of the firms with an emphasis on different types of controlling shareholders. This comparison finds empirical evidence that family-owned companies, foreign-controlled companies and firms with more than one controlling shareholder are better in terms of ROA than firms without controlling shareholders (Wiwattanakantang, 2001). Dimelis and Louri (2002) perform an empirical analysis to examine the effect of different levels of foreign ownership on the labor productivity of manufacturing firms, proxied by output per worker. As a result of the empirical study, which employs quantile regression analysis, they conclude that majority ownership by foreigners does not have a significant effect on output per worker for the very productive or least productive firms. However, majority ownership is found to be positively and significantly related to output per worker in the middle-productivity range (Dimelis and Louri, 2002). Munday et al. (2003) conduct a panel data analysis covering the period between 1994 and 1998 to compare the profitability of domestic firms and foreign subsidiaries in the UK. Two profit variables, namely, return on total capital employed and profit margin, are employed to assess the performance of the firms. The results evidence the relatively poor profit performance of foreign subsidiaries in the manufacturing sector with the Japanese being the worst performers (Munday et al., 2003). Yudaeva et al. (2003) analyze the productivity of Russian firms with regard to the differences between the ones that are fully domestically-owned and at least partially foreign-owned. The results of their study indicate that foreign firms are more productive than domestic ones. They reason that the difference in efficiency can be due to the benefits that accrue to those firms from their foreign owners in terms of managerial experience, Research and development investments and distribution networks. The ease of access to foreign credit markets is defined as another factor that contributes to the productivity of foreign-owned firms. However, they also conclude that there is no statistically significant difference between the productivity of firms based on the percentage of foreign ownership (Yudaeva et al., 2003).
investigated, no statistically significant difference is observed between minority and majority levels of foreign ownership in terms of productivity. They further analyze the spillover effect of the foreign corporations and the results reveal that the productivity of domestic firms are positively affected by foreign presence again with no statistically significant difference between the minority and majority levels of foreign ownership (Blomstrom and Sjoholm, 1999). Chhibber and Majumdar (1999) emphasize that the nature of the relationship regarding the decision to license, franchise, take part in a joint venture or entirely own a foreign company is an important strategic choice. As a result of their empirical analysis, they conclude that foreign firms with a 50% or greater foreign shareholding perform better than firms with minority foreign shareholdings and domestic firms in terms of return on sales and return on assets. Djankov and Hoekman (2000) assert that technology transfer will result in an increase in productivity and use total factor productivity as an approximation for technology transfer. As a result of their study, they find FDI to have a significant and positive impact on the transfer of technology. Firms which are acquired by foreigners are found to have the highest level of growth in total factor productivity, while those without foreign partnerships are proven to exhibit the lowest growth rate in this measure (Djankov and Hoekman, 2000). Konings (2001) uses firm level panel data to explore whether the financial performance of foreignowned subsidiaries is better than that of domestic firms in three emerging economies. Log of output is used as an indicator of performance and the results of the analysis reveal that foreign firms do not perform better than domestic ones in Bulgaria and Romania. However, a positive and significant effect of foreign ownership on firm productivity is observed in Poland. This finding is explained by the time it takes for foreign ownership to have an impact on performance due to delays in restructuring (Konings, 2001). A research study performed by Gedajlovic et al. (2005) evaluates the impact of ownership structure on the financial performance and investment behavior of firms in Japanese manufacturing industries. They assert that foreign ownership, which is approximated by the percentage of outstanding shares held by foreign investors, is positively and significantly related to dividend payout. They further conclude that there is a negative and marginally significant relationship between foreign ownership and capital expenditures. However, no relationship is observed between ROA, as an indicator of profitability and foreign ownership (Gedajlovic et al., 2005). 352
Am. J. of Economics and Business Administration 2 (4): 350-359, 2010 Barbosa and Louri (2005) conclude that performance of firms in Portugal is not affected by foreign ownership after controlling for firm and industry specific characteristics. However, they find ownership by foreign investors to have a positive and significant effect on the profitability of firms in Greece measured by gross return on assets in the upper quantiles of the profitability measure (Barbosa and Louri, 2005). Douma et al. (2006) analyze the effect of foreign ownership on the financial performance of Indian corporations with a distinction between foreign institutional and foreign corporate shareholders. They find that foreign firms perform better than domestic ones in terms of Return On Assets (ROA) and Tobin’s Q. Upon further analysis, they conclude that ownership by foreign corporations has a positive and significant impact on both performance measures. When the results for foreign institutional investors are analyzed, no significant relationship is observed in terms of ROA. However, these investors have a positive and significant impact on Tobin’s Q and this impact is larger than that of foreign corporate shareholders. Thus, the researchers conclude that foreign institutional investors may be
investing in firms that are already better in terms of market returns (Douma et al., 2006). Data and sample selection: The data used in this study is obtained from the publicly available database of the Istanbul Stock Exchange (ISE). The annual reports that display the shareholding structures, the financial statements, the footnotes to these statements and any other data relating to the dividend policies and exporting and importing behavior of the companies are collected from the database on a yearly basis for each firm. The data set consists of the nonfinancial companies listed on the ISE covering the time span of 3 years over the 2005-2007 period. Some companies are omitted due to a lack of data. Previous years are not included in this study to prevent any distortion that may result from the application of Inflation Accounting Practices in Turkey. The high inflation rates experienced in Turkey between 1950s and 2000s can prevent financial statements from presenting comparable information. Therefore, inflation accounting practices are accepted to be applied since the beginning of 2004 to provide reliable information even during periods of high inflation.
Table 1: Summary of the variables, abbreviations and definitions The dependent variables EBITTA The ratio of earnings before interest and tax to total assets ROA The ratio of net income to total assets The explanatory variables FDIPERCENT The percentage of shares that are owned by foreigners MIN A dummy variable equal to unity if foreigners own 50% or less of the shares of the company (but more than 10%) and otherwise equal to zero MAJ A dummy variable equal to unity if foreigners own more than 50% of the shares of the company and otherwise equal to zero MIN2005 A dummy variable equal to unity if the foreigners own 50% or less of the shares of the company (but more than 10%) in year 2005 and otherwise equal to zero MIN2006 A dummy variable equal to unity if the foreigners own 50% or less of the MIN2007 A dummy variable equal to unity if the foreigners own 50% or less of the shares of the company (but more than 10%) in year 2007 and otherwise equal to zero MAJ2005 A dummy variable equal to unity if the foreigners own more than 50% of the shares of the company in year 2005 and otherwise equal to zero MAJ2006 A dummy variable equal to unity if the foreigners own more than 50% of the shares of the company in year 2006 and otherwise equal to zero MAJ2007 A dummy variable equal to unity if the foreigners own more than 50% of the shares Dom2005 A dummy variable equal to unity if the firm is fully domestically owned or the share of the company in year 2007 and otherwise equal to zero foreign ownership is less than 10% in the year 2005 DOM2006 A dummy variable equal to unity if the firm is fully domestically owned or the share of foreign ownership is less than 10% in the year 2006 The control variables SIZE The log of net assets AGE The number of years that passed since the establishment of the firm to the observation date DEBT The ratio of long and short term debt to total assets CLTA The ratio of current liabilities to total assets IMPCOGS The ratio of imports to cost of goods sold EXPNETSALES The ratio of exports to net sales DIVPAYOUT The dividend payout ratio obtained from the ISE CAPINTENSITY The ratio of net fixed assets to total assets INVTURNOVER The ratio of cost of goods sold to average inventory CURRENTRA The ratio of current assets to current liabilities NETSALESTA The ratio of net sales to total assets
353
Am. J. of Economics and Business Administration 2 (4): 350-359, 2010 of minority and majority foreign ownership on financial performance and explore whether they display superior performance compared to domestic firms. The estimation of these separate models is important because each one of them provides insight into the relationship between different measures of financial performance and foreign ownership from different perspectives. In order to have a better understanding of the models applied and the variables employed in these models, Table 2 is provided.
Finally, a balanced panel data set of 205 companies is employed, resulting in a final sample of 615 firm-year observations. The variables: The variables employed in this study are determined based on previous empirical work and the specific conditions under which firms listed on the ISE operate. Table 1 displays the list of the dependent, explanatory and control variables together with their explanations.
The issue of causality: The studies that investigate the impact of ownership structure on performance are confronted with the problem of a potential reverse relationship. This implies that the financial performance of a company can be affecting the ownership structure in that the explanatory variable referring to foreign ownership in the model can be determined simultaneously with the performance measure, which is originally the dependent variable. The first study that analyzed this reverse relationship was that of Demsetz (1983), who considered the ownership structure to be endogenously determined. He argues ‘no single ownership structure is suitable for all situations if the value of the firm’s assets is to be maximized’ (Demsetz, 1983). The issue of treating the ownership structure as an endogenous variable is further stressed in the work of Demsetz and Villalonga (2001). It has to be stated that the ownership structure of the companies that are the focus of this study are rather stable over the time period analyzed. However, following the work of Thomsen and Pedersen (2000), causality tests are conducted between each of the two variables that measure performance and the percentages of foreign ownership. In order to determine whether changes in performance affect the percentage of shares that are held by foreigners, a test is conducted to explore if the changes in the performance measure, which is the dependent variable in the original model, is a significant determinant of the foreign ownership in 2007. Thus, the equation for this test can be written as:
MATERIALS AND METHODS The use of the panel data in this study enables to conduct an analysis of many firms overtime by combining time-series and cross-sectional information. When the relationship between performance and foreign ownership is analyzed in a cross-sectional regression, the heterogeneity that is unobserved can cause to drive biased estimates due to the correlation between the variables and the error term. Panel data analysis is applied in this study following the works of Himmelberg et al. (1999) and Wintoki et al. (2010). Three models are estimated for each dependent variable making up a total of 6 models to gauge the influence of foreign ownership on firm financial performance. In these models, only the explanatory variables employed are different; meaning that the same set of control variables are used for each model. The first type of models investigates the impact of foreign ownership denoted by the percentage of shares held by foreigners on the two different financial performance measures, which are the ratio of Earnings Before Interest and Tax to Total Assets (EBITTA) and Return On Assets (ROA). The second type of models takes a more detailed perspective and differentiates between minority and majority levels of foreign ownership. Thus, the analysis is conducted to examine whether companies that display foreign ownership within certain ranges outperform the domestic ones. In the last type of models, eight dummy variables, which are labeled as MIN2005, MIN2006, MIN2007, MAJ2005, MAJ2006, MAJ2007, DOM2005 and DOM2006, are generated to see the yearly influence
FDI2007 = Constant + β. (change in performance measure btw 2005-2007)
Table 2: The models used in the analyses Model Dependent variable employed 1 EBITTA 2 EBITTA 3 EBITTA
Explanatory variable employed Control variables employed FDIPERCENT MIN, MAJ MIN2005, MAJ2005, DOM2005 11 control variables* MIN2006, MAJ2006, DOM2006 MIN2007, MAJ2007 4 ROA FDIPERCENT 5 ROA MIN, MAJ 6 ROA MIN2005, MAJ2005, DOM2005 MIN2006, MAJ2006, DOM2006 MIN2007, MAJ2007 *: The control variables employed are the same for all of the models and they can be listed as SIZE, AGE, DEBT, CLTA, IMPCOGS, EXPNETSALES, DIVPAYOUT, CAPINTENSITY, INVTURNOVER, CURRENTRA and NETSALESTA. They are not displayed on the table for each model to save space
354
Am. J. of Economics and Business Administration 2 (4): 350-359, 2010 RESULTS
When this equation is applied for each measure of financial performance named as EBITTA and ROA, no significant relationship is observed between the changes in performance and the ownership structure. Thus, it can be stated that there is no problem in defining the structure of ownership as an exogenous variable in the model of this study. Alternatively, Vector Autoregression Model (VAR) can be used in this kind of analysis but due to the short time interval (3 years) it cannot be applied to this case.
In the results, the relationship between firm financial performance and foreign ownership is analyzed depending on the results obtained from Generalized Least Squares (GLS) corrected for heteroskedasticty and serial correlation. The Table 3 displays the outcomes of the analyses. As the table represents, the control variables used in this study have certain significant impacts on firm performance and thus need to be discussed.
Table 3: The results of the analyses EBITTA -------------------------------------------------------------------Dependent variable Model 1 Model 2 Model 3 SIZE AGE DEBT CLTA IMPCOGS EXPNETSALES DIVPAYOUT CAPINTENSITY INVTURNOVER CURRENTRA NETSALESTA FDIPERCENT
0.0196*** (25.03) 0.0003*** (3.64) -0.0207*** (-3.04) -0.1193*** (-13.56) -0.0201*** (-5.23) -0.0492*** (-10.41) 0.0017*** (5.46) -0.1178*** (-21.08) 0.0000*** (4.07) 0.0000 (0.18) 0.0195*** (14.20) 0.0055 (1.23)
MIN
0.0207*** (27.32) 0.0002*** (2.68) -0.0244*** (-3.16) -0.1065*** (-10.97) -0.0220*** (-5.67) -0.0437*** (-9.29) 0.0017*** (5.55) -0.1160*** (-19.49) 0.0000*** (3.96) 0.0000 (0.48) 0.0181*** (11.47)
0.0220*** (19.23) 0.0003*** (2.81) -0.1095*** (-9.74) -0.0746*** (-5.04) -0.0145** (-2.47) -0.0257*** (-3.98) 0.0037*** (7.59) -0.1128*** (-12.09) 0.0000 (0.07) -0.0003 (-0.46) 0.0109*** (4.95) -0.0087* (-1.87)
0.0172*** (3.92) 0.0030 (0.69)
MAJ MIN2005 MIN2006 MIN2007 MAJ2005 MAJ2006 MAJ2007 DOM2005 DOM2006 Constant
0.0215*** (30.88) 0.0004*** (4.15) -0.0564*** (-5.61) -0.0744*** (-5.95) -0.0297*** (-5.65) -0.0405*** (-7.06) 0.0016*** (5.32) -0.1174*** (-23.50) 0.0000** (2.54) 0.0002 (1.31) 0.0182*** (10.41)
ROA ------------------------------------------------------------Model 4 Model 5 Model 6
-0.2379*** (-16.31) 611.0000 204.0000 2455.1900 0.0000 1272.5520
-0.2593*** (-17.93) 611.0000 204.0000 2484.3100 0.0000 1273.5300
0.0229*** (23.18) 0.0002*** (2.65) -0.1095*** (-10.03) -0.0640*** (-4.45) -0.0169*** (-3.03) -0.0228*** (-3.58) 0.0034*** (7.36) (8.05) -0.1124*** (-12.45) 0.0000 (0.04) -0.0003 (-0.49) 0.0082*** (3.72)
0.0227*** (20.53) 0.0003*** (3.58) -0.1140*** (-8.50) -0.0579*** (-3.56) -0.0190*** (-3.25) -0.0219*** (-2.78) 0.0033*** (8.05) -0.1109*** (-11.58) 0.0000 (0.14) -0.0005 (-0.78) 0.0088*** (3.89)
0.0172*** (4.77) -0.008** (-1.97) 0.0140*** (3.13) 0.0199*** (4.37) 0.0184*** (3.48) 0.0053 (0.72) 0.0052 (0.68) -0.0019 (-0.22) -0.0114*** (-9.29) 0.0117*** (11.01) -0.2745*** (-19.78) 611.0000 204.0000 3585.6100 0.0000 1229.4310
Number of observations Number of groups Wald chi2 (19) Prob > chi2 Log likelihood *: p
